Wednesday, January 31, 2007

Both AMD and Intel claimed they gained market share in Q4 2006 at their recent analyst conferences (See AMD; Intel). According to Mercury Research, the results favored AMD, but there were some boasting rights for Intel as well.

Overall AMD increased its market share, breaking the 25% barrier for the first time ever, with 25.3% of shipments. AMD's gains came in processors for desktop systems, where it had 29.1% market share, and in notebook processors, where it moved up to 19.4%.

But in the higher margin server market AMD lost market share sequentially. In Q3 it had peaked at 23.6%; in Q4 it came in at 22.2%. Still, that was up from Q4 2005 when it had only 16.4% of the market.

I am actually surprised by how well AMD held market share against Intel's new chips that finally caught up to AMD's technology lead. Intel is still the default decision for most IT professionals; some of Intel's problems earlier in the year were because buyers were waiting for the new Intel chips rather than switching to AMD. Intel's media hype was extreme, and now that Intel chips are in Macs the Mac-biased media types weren't in attack mode.

For short term investors neither Intel nor AMD is a good bet. Both could make significantly higher profits if they would back off this market share war, but neither will. AMD is determined to keep gaining market share; Intel is determined to put AMD back in the under-10%-of-market box that allowed Intel to become fat, lazy, and stupid yet very profitable in the late 1990's.

AMD has picked all the low-hanging fruit. The major computer makers IBM, HP, Dell, Lenovo and Sun all use AMD processors now. Those IT professionals who did not buy AMD when it had a clear performance lead now have an excuse to go back to the safe choice. Intel still has a lot more money than AMD and therefore can win a price war.

For AMD the question is: how good are the new Opterons coming out in June or July going to be? Can they make Intel look stupid again? There are some hints that they can, but Intel engineers are working overtime as well, as anyone would trying to keep their jobs after the massive cuts Intel had to make in 2006.

For long term investors the best strategy is to hedge the bet by having both Intel and AMD stock. Some day they will back off their price wars and profits will skyrocket.

But the smart money is on AMD, not because it is a clear winner, but because it had so much less to lose and so much more to gain. The stock is selling for not much more than when it had far lower market share. It is a risky stock, but if AMD does reach 50% of the market in 3 to 5 years, it will be set up to be a profit powerhouse.

Wednesday, January 24, 2007

Yesterday I listened to three analyst conferences, and you can read my summaries of them if you like: Advanced Micro Devices (AMD), Yahoo (YHOO), and Sun Microsystems (SUNW). I currently own stock in AMD; once I lost some money holding Sun waiting for a turnaround back in 2003.

Often you learn about general trends in an industry from listening to management trying to explain their results at an analyst conference. For instance, a number of semiconductor chip makers had slow third and fourth quarters of 2006. Several claimed that end-user demand was fine, but that manufacturers who incorporate their chips into products like cell phones had tightened up on inventories. Thus slower sales. So everyone is predicting growth in 2007, unless the global economy sinks. It is a reasonable story, but still might not be true, especially for an individual company.

Yesterday I learned something important about AMD's long and short term outlooks during the Sun conference. Sun has worked with AMD closely for about 3 years now, producing high-quality, relatively low cost servers based on Opteron chips. Monday Sun and Intel announced a deal: in return for also using Intel's new line of Xeon chips, Intel would allow anyone, including Sun's competitors, to license Sun's Solaris operating system, which almost every tech pundit acknowledges is the best Unix around. Solaris is way better than Red Hat Linux or Novell's Linux, so they say (I run Windows, so this is hearsay). By getting some of HP and IBM's and even Dell's customers to switch to Solaris, Sun can create an important income stream for itself (I think Solaris is now free but you have to pay for technical support).

With respect to AMD, Sun's management made it clear, saying it several times during the conference, that they expect more sales of servers with AMD Opterons in them, not less. They are adding Intel Xeon based servers which they expect to cut into sales of competitor's Xeon servers. Solaris is already available for AMD Opterons.

The timing of this move is important as well. There will be no significant shipments of the Xeon servers until the second half of 2007. By then the new generation of Quad core Opterons will be competing with quad-core Xeons. Both companies will be at 65 nm process, leveling that playing field. Xeons will still have external memory management; Opterons their famous, but improved, Hypertransport on-chip memory controller. AMD says their chips will be the clear leader in performance and performance per watt and performance per dollar. We won't know until independent testing is done, but if it is true, then AMD will continue to gobble up market share and maybe even have gross margins that pump up the stock price. But this is not a stock for short-term investors. While Intel is still stuck in short-term mode, the management at AMD thinks long term. They were not afraid to say that to analysts yesterday. Their honesty is refreshing.

Thursday, January 11, 2007

The fact that the markets in a particular stock are only technically in equilibrium is easy to observe, economic fundamentalism to the contrary.

Some time in the last 24 hours demigod Jim Kramer said to buy Petsmart (PETM) and a bunch of people must have because over 1.7 million shares changed hands today and the closing price was up $1.14 per share to $31.36, a rise of 3.77%. The market capitalization of the stock shot up $159 million.

Now does anybody really think that the fundamental value of the company changed $159 million in 24 hours? Maybe if some fundamental news came out. But this was a comment by a commentator on a TV show. The same is true of most upgrades and downgrades from brokerage houses. They often site trends or ideas that were publicly known well before the changes in ratings.

But I bought Petsmart (PETM) back on 4/15/2005 when it was at $26.60 per share. At the time I realized all my stocks were either software or hardware; I was looking for diversification. I know a little bit about the retail trade, plus anyone can take a trip to the mall and see how stores appear to be doing. The closest Petsmart is a 2 hour drive from my house, but then the closest stores of most national chains are as distant. I had shopped at Petsmart, I liked their strategy of building new stores, and I liked the price of the stock. But I never expected a big runup. You have to buy into a company when it is smaller, usually, to get that. I bought three retail stocks, using the same criteria.

Is Petsmart fairly valued at $31.36? To me it looks within the range. It is still adding stores, but at some point the pet-superstore market will be saturated. Rival Petco is also still opening stores, and they are way bigger than the older Petcos. PETM's trailing price/earnings ratio is 24.89, which is pretty bullish. Forward PE is 19.24, which is more reasonable. The holiday quarter's results will be the lynchpin of true value. Did people pamper their pets? Were costs kept under control? If Jim Cramer is right and this is a turnaround, wouldn't it have been nice to have figured that out when the price of the stock was lower? It has been as low as $22.07 in the past 52 weeks. Why was it worth $22.07 then but $31.36 today?

As far as I can tell, not that much has changed. Petsmart is well managed. Their stores look like they are staffed with people who care about your pets. That was true long before I bought the stock.

Wednesday, January 10, 2007

I am going to begin summarizing HP analyst conferences. The next conference is not until February 20th, but I've been thinking about my relationship with HP [stock symbol: HPQ].

HP used to be Hewlett-Packard after the last names of the two men who formed the company in 1939 long before I was born. The company did not incorporate until 1947, a year when its revenues approached $1 million.

I first heard of Hewlett-Packard in the mid-1970s, in college, when hand-held calculators first became popular. I have never owned one made by HP; right now I have a TI and a Casio that are put to good use. The thing about HP was that it was not a consumer-goods producer, but an engineering firm. Early on it seemed like it would miss out on the PC revolution, but of course now it is a big name in personal computers, servers, storage and related things. It spun off Agilent a few years back, a stock I briefly owned. I also owned HP from 12/09/2003 until 2/2/2004 and made a good return on it.

I am working, typing in this blog entry, on an HP Pavillion a200y that I bought several years back for some experimenting I was doing with black boxes. It is my general purpose computer now because I consider it expendable. My newer computer is from Systemax, customized, runs on an AMD dual-core 64 bit processor, and is just waiting to install Microsoft Vista. At that point the HP will be used for Linux experiments.

On my quality scale of computers I have owned, the a200y is pretty near the bottom. I won't go into its problems but they seem to be mostly related to HP using overly cheap components. The result was a ridiculously low price, and I've certainly gotten my money's worth of use out of it. But it brings up the problem faced by Dell as well as HP and other computer vendors: how much can you compete on price before you are using lousy components that ruin your reputation for quality?

But I also have a HP LaserJet 1020 which was ridiculously inexpensive to buy and has performed great. As a small, black and white laser printer I can highly recommend it. Printers and supplies for them are a big part of HP's current success.

HP stock closed today at $42.20, which makes me realize I would have been better off as a long-term investor. But seeing into the past is a lot easier than seeing into the future.

According to NASDAQ HPQ has a price-earnings (PE) ratio of 19.36, which inverts to a 5.17% return. That is very reasonable if you expect HP to chug along for the next 10 or 20 years. The dividend of $0.32 per share works out to a 0.76% return. So the hope of HP investors is clearly that they will get price-appreciation, not just the paltry dividend.

I see no reason for someone like me to buy HP stock right now, but who knows, maybe if I listen to the analyst conference I may understand it better and change my mind. Or not.

Monday, January 8, 2007

Anesiva (ANSV) announced today that it completed a successful meeting with the FDA. Based on FDA feedback, they released a plan for Phase 2 and 3 trials for their 4975 compound, which is a long-term, non-opioid pain reliever.

But first, be aware that I own stock in ANSV and think investors should consider all stocks in biotech companies that have not actually brought drugs to market to be very risky investments. Also, at least short term, ANSV stock price is much more dependent on whether the FDA approves Zingo, a local anesthetic that has completed its Phase 3 trials, than on 4975.

4975 is a formulation of capsaicin, a TRPV1 agonist that blocks pain transmission in nerve cells. It acts for weeks without the ugly side effects of the current drugs of choice, opioids. During surgery it is dripped into a wound. Other than that the surgery is completed as usual. Because of the way drugs are approved at the FDA, companies can't just apply to have a drug approved for surgeries in general. So after doing a series of Phase 2 trials on different types of surgical pain, Anesiva guys met with the FDA and came up with this plan to get approval for four indications, involving 4 Phase 2 trials: hip replacement surgery, knee replacement surgery, arthroscopic should surgeries, and for osteoarthritis (in absense of surgery).

But clearly they are concentrating on knee replacement surgery, the only indication for which they announced a planned Phase 3 trial, beginning in the second half of 2007. Phase 2 trials in all four indications are to begin in the first half of 2007.

This is great news for current investors. At the same time FDA approval is not guaranteed. If the trials are successful it would be 2008 before approval could be granted. There were 470,000 knee replacement surgeries in the USA in 2005, and if that program goes well then getting approval for other types of surgery and long term pain should be relatively easy.

Meanwhile we anxiously await approval on Zingo, which provides immediate, skin level anesthetization and is designed to reduce pain for needle insertions. My understanding is that thumbs up or down from the FDA should come in the first half of this year.

To learn more see my summaries of Anesiva's quarterly analyst conferences.

Thursday, January 4, 2007

AMD's stock price fell yesterday to $19.52 per share after a Goldman Sachs analyst downgraded the stock to Sell. Reasons given were "concerns about higher spending, a weak price environment for PC chips, and increased competition from its larger rival Intel." [Dow Jones Business News]

I own AMD stock. I bought it on 8/3/2004 at $11.86 per share. So although I am trying to be objective here, take that into account and think for yourself about what I have to say.

According to the NASDAQ web site, in the past 52 weeks the stock has traded as high as 42.70 and as low as 16.90. It currently has a PE (price/earnings) ratio of 18.85, and a forward PE ratio of 12.30. Normally a rapidly growing technology company like AMD would have a PE ratio well above 30. Which is to say, investors are discounting both AMDs past performance and the trend towards increasing earnings.

There is a big reason: AMD is in an economic and technological war with Intel, which only a few years ago owned the global microprocessor market, allowing AMD less than a 10% market share.

But all technology companies are in fierce competition. Apple is still in fierce competition with Microsoft, but it is growing and has a PE ratio today of 37.74. Intel itself today had a PE ratio of 21.2 (with a forward PE ratio of 14.9).

Like so many companies, you cannot just look at AMD aggregate data like annual or quarterly revenues. AMD spun off its Spansion memory-chip division and acquired graphic chip maker ATI in 2006. ATI revenues have not been consolidated in, but Spansion revenues have come out. For the core (mainly processor chip) business, Q3 2006 revenues were $1.3 billion, up 32% from the year earlier quarter. Net income was $134 million, up 50% from a year earlier.

Again, normally number like that would command a high PE ratio. And that is despite everything Intel could throw at AMD, including liquidating much of its antiquated chip inventory, which did drive pricing down.

Sell side analysts work for brokers that make their money when you buy and sell a stock. Without discounting that bias, in 2006 a Citibank analyst downgraded AMD stock early in the year, then upgraded it later in the year. The same reasons were given for the downgrade: low prices (called ASPs, actual sales prices, to distinguish from list prices) from the war with Intel. The upgrade was because AMD stock did fall, but then AMD had okay if degraded revenue and income anyway.

Why did Goldman Sachs wait to downgrade the stock until yesterday when AMDs aggressive spending plans and acquisition of ATI have been open for all to see for a year? I think it is because AMD stock climbed substantially after the December, 14, 2006 Analysts Day presentation (see my notes).

Recent testing shows that AMDs processors remain superior to Intel's, largely due to Intel's poor memory management. Most tech guys expect AMD processors to improve greatly this year as it produces chips with the 60 nm process. Intel already switched to 60 nm, but its inefficient chip design ate up the benefits of that more.

AMD is thinking long term. That is why they bought ATI, are finishing up their new plant in Germany, have a good fabless capacity, and have an option on building a new fab in New York State. I am sure Intel thinks long term too, and they aren't nearly as arrogant as they were 3 years ago.

If Goldman Sachs is right AMD had a poor 4th quarter compared to Intel. The new Duo chips from Intel were supported by a massive marketing campaign. Lots of tech buyers own Intel stock, and I know that influences decisions (of the 4 working computers I own, 3 are Intel based, only the newest has an AMD chip). ATI had some problems that will need to be worked out in 2007.

But lots of the smartest tech guys, especially the ones who have to run big server farms, have shifted over to AMD in the past 3 years. As long as AMD continues to build superior processors, the shift will continue. The only power Intel has is to determine the level of profits at both companies.

There are no guarantees. AMD may make a mistake. But it looks to me like AMD has the better processors and the better road plan. I think the most likely path is that AMD will continue to chew at the Intel dinosaur until it is dead. If that happens I hope AMD won't grow as arrogant as Intel did.

Monday, January 1, 2007

What will the economy do in 2007? While there are some dangers, and unexpected events may change things, I think the U.S. economy will do just fine in 2007. The world economy will do better.

I have followed the statistics and the predictions of government agencies, investment banks, and assorted pundits. In 2005 I made a pretty good prediction (read it). For 2006 I was busy and wrote nothing down. If you are an investor you want to know not just how the economy will do overall, but how individual sectors will fare. Though I am a math guy and like to make models, I think the human brain, mine anyway, is still best for modeling complex systems like the economy. So this is what I think:

China and India will continue to boom. With increasing domestic consumption they will continue to be positive drivers for the manufacturing and intellectual property side of the U.S. economy. Electronic chip makers who can produce the best technology and get good prices for their chips will continue to do well.

The commodities boom as a whole is not so much over as adjusted to the market. New mines and processing facilities that were created in response to higher prices will keep a lid on commodity prices overall. Only specific goods where their are genuine global shortages that are difficult to rectify with new investments will see significant price increases. That said, petroleum is a wild card. Capacity seems adequate for now, but purposeful production cutbacks will probably keep oil well above $50 per barrel. A major war could send prices far higher.

The housing market in the U.S. is going to recover in 2007, but more slowly than predicted because prices have not, and probably will not, drop enough to accelerate the demand side. I would not look for significant increases in new house construction until the second half of the year.

Retail as a whole will have a modest year. One good thing about people not buying houses is that they tend to have more cash around to spend on other things, which will offset in part the decreasing wealth effect from people using their house appreciation as income.

Interest rates will stay in a narrow range. If housing does pick up in the second half and manufacturing and services stay strong, which is likely, look for rates of 6% and higher by the end of the year.

I think the bond market is wrong, at least for the short run. I am not known for being overly optimistic about the economy, but that is based on realism. I called the imbalances of the late 1990's. Now that things are more in balance, the fools who told you that the stock market had nowhere to go but up in 2000 are overestimating the chances of recession in 2007. Bond rates are mostly too low, not because inflation is likely to heat up significantly, but because the Federal Reserve will eventually raise rates to keep inflation at bay.

The stock market as a whole is not overvalued right now. Of course some individual stocks are. But there are plenty of stocks that are undervalued, too. This is an ideal field for picking individual stocks.